Mena states face subsidy, jobs challenges

Dubai, October 20, 2013

Countries in the Mena region must tackle three core challenges -- subsidy reforms, creation of employment opportunities and development of robust legal systems -- to increase the pace of their economic growth, a report said.

Social and political challenges in the wider Levant and North Africa are in stark contrast with the economic boom being enjoyed by much of the GCC, said the Standard Chartered report "Mena - Adjusting to Reality".

The GCC economies are benefiting from years of robust hydrocarbon dynamics, although they also face longer-term challenges, said the report.

The report highlighted the need for subsidy reforms to reduce the load on government finances in the region. While these measures may bring near-term pain, they are essential to reduce heavy subsidy burdens in the region, it said.

Subsidies in the region are too high, especially in the energy sector. This creates a fiscal burden on oil importers, and productivity distortions for oil exporters. The Mena region's energy subsides are equivalent to $236.7 billion annually, according to the IMF – 50 per cent of the global total. Some countries are implementing reforms, either by cutting subsidies directly or by developing alternative sources of energy to meet high levels of domestic energy consumption. In other countries more needs to be done, it said.

Saudi Arabia is pouring resources into its longer-term development objectives, supporting healthy economic growth. Yet this brings inflation and concerns about productivity, it said.

Dubai's economy, which not long ago faced severe challenges, is performing extremely well against a backdrop of strong investment in the region, benefiting from its role as a trade and services hub.

Jordan is now fast-tracking badly needed energy reforms to slow the drain on government finances. Egypt's political transition is ongoing, and funding from the GCC is supporting the Egyptian pound (EGP) and the balance of payments, the report noted.

Reforms, however, have been delayed and look unlikely as long as social pressures and political uncertainty remain high in Egypt, it said.

Employment challenges are widespread in the region, even in wealthy economies like Saudi Arabia and creating sustainable employment opportunities is a priority, it said.

In the hydrocarbon-rich GCC, participation rates for GCC citizens in the private sector are very low. On average, less than 10 per cent are employed in the private sector (expatriate workers account for almost 90pc of private-sector employment). The public sector remains the largest employer of GCC nationals, reaching almost 90pc in some countries. This is an unhealthy balance, and governments are taking steps to address it. In other parts of Mena, the challenge is a weak private sector that is struggling to attract enough investment to create job opportunities, the report said.

Meanhile, Saudi Arabia is determined to fight unemployment. The country's private-sector job market is dominated by expatriates, who number almost 8 million; until recently, the country also had 2 million undocumented workers, according to market estimates. A key challenge is to shift more Saudi nationals into the private sector, where fewer than 10pc of Saudis currently work. The government's Saudisation programme has created 600,000 new jobs for Saudi nationals since its launch less than two years ago. Under the programme, private-sector companies must meet a quota for employing Saudi nationals.

"In the longer term, policy makers need to ensure that Saudi nationals have the necessary skills to take on new job opportunities. While a quota-based system has near-term merits in helping create jobs, matching skills to available jobs is a longer-term challenge," it said.

Creating a macroeconomic environment conducive to investment inflows is an important priority for the region, especially for economies that face funding deficits. Flows to Egypt have come from GCC countries including Saudi Arabia, the UAE and Kuwait. These funds will be used to finance the government's large subsidy bill for power and food. Nearly $2 billion of this aid will be in the form of direct oil shipments. While this support is welcome, countries like Egypt must also implement the necessary macroeconomic, legal and subsidy reforms to attract private investment, it said.

In challenged pockets of the region, fiscal support from political allies can only go so far. Jordan's measures to tackle large subsidies show that such reforms are possible, even against a backdrop of strong domestic opposition, it said. - TradeArabia News Service